Mexico’s Oil and Export Problem

February 24, 1947

MEXICO CITY—If Mexico is to maintain the present exchange value of the peso and put its economy on a permanently sound basis, it must solve the basic problem of providing enough exports to pay for its necessary imports. In 1946 it imported 2,637,000,000 pesos worth of goods and exported only half as much—1,384,000,000 pesos worth (not including about 450,000,000 pesos in gold and silver). Part of the gap can no doubt be covered by long-term borrowing from abroad, but even this will not be encouraged unless the gap is narrowed.

A large part of Mexico’s recent exports reflect a wartime demand that cannot continue. An outstanding example is textiles. Exports of cotton cloth rose from zero in 1940 to 177,000,000 pesos’ worth in 1945, and may fall back to zero again.

Mexico’s principal hope for future exports, according to the best opinion here, lies chiefly in two sources—petroleum and mining products. Yet the outlook for either is far from promising at the moment. The history of oil in Mexico is a perfect illustration of the shortsightedness of seizure and nationalization.

The American and British oil properties were expropriated by the Mexican Government on March 18, 1938. They were turned over for operation to a semi-autonomous government corporation, Petróleos Mexicanos, or Pemex. Incredible as it may seem, this corporation does not publish even perfunctory annual reports. Its operations are shrouded in mystery. The new manager, however, Antonio J. Bermudez, who is highly regarded, has made a few statements within recent months from which a picture of Pemex operations can be pieced together. In 1937, the year prior to the seizure, the payroll of the oil companies amounted to 56,000,000 pesos. In 1941 it had been raised to 91,000,000, and in 1946 to 216,000,000. The number of workers was increased from 13,120 in 1937 to 24,726 in 1946. But this huge increase in personnel and payroll expense has not been matched by any corresponding increase in production. On the contrary, annual production has never since (with the possible exception of 1946) equaled the 47,000,000 barrels of crude petroleum produced in 1937. Average production in the eight years from 1938 through 1945 was only 40,000,000 barrels.

Even this production has been achieved only by the dangerous practice of over-pumping existing wells, which may mean a loss of part of the reserves. Almost no exploration work has been done to bring in new wells. Yet up to 1936 statistics showed that the average life of a Mexican well was less than eight years. An official report in 1937, advocating the expropriation, itself declared that all the existing petroleum fields of Mexico were about to be exhausted with the exception of those at Poza Rica and El Plan. There is no evidence that Pemex makes adequate depreciation or depletion allowances in its accounts. It is widely taken for granted that its deficits are chronic. In fact, some think appropriations, ostensibly for capital works, were really to cover operating deficits.

Petroleum exports, once the chief means of balancing Mexico’s foreign accounts, have declined heavily. This is partly because of the increase in domestic consumption of petroleum, which has increased tenfold since 1925. Sr. Bermudez recently announced that Pemex was exporting a million barrels of petroleum a month. Yet astonishing as it seems, Mexico has recently been on net balance an importer of petroleum products from the United States.

Mexico’s mining problem is similar. Its high-grade metallurgical deposits have been nearly worked out. Virtually no new fields have been brought in since Spanish colonial days. Mining is inordinately taxed. The result has been to drive small producers out of business, to discourage exploration, and to prevent the working of low-grade ores. In 1946, metallurgical production, including gold and silver, was only 60 percent of that of 1929.

Mexico’s budget problem, which lies at the basis of the inflation, is far from solved. Federal expenditures for 1947 are estimated at 1,667,000,000 pesos, 72 percent above the average of the war years, and the greatest in the history of the country.

Yet most of Mexico’s difficulties are man-made. They can be surmounted by the adoption of more farsighted policies.